SEC to Investigate Trading in Facebook Shares

I told you so…the SEC has confirmed it will investigate the trading in Facebook this morning. Here is the response I got from the SEC:

“As is our practice, staff will review the incident with Nasdaq to determine its cause and steps that will be taken to address it.”

In case you haven't heard, orders to buy or sell prior to the Facebook stock opening did not get confirmed for hours. This meant that if you had an order to, say, sell 100,000 shares, you did not get confirmation that the trade had been executed for hours later — into the afternoon. That meant you didn't know where you stood in your tradebook. You couldn't decide if you needed to buy more, sell more, whatever. Major time risk.

What happened? It's not clear, but it is pretty clear that the technology did not hold up under the weight of the message traffic.

The institutional community is furious. They want answers. And the problems went beyond FB — many other stocks were affected. Zynga, for example, was halted TWICE for what is being called the "Single Stock Circuit Breaker" rule. But this rule mandates a trading halt of five minutes: the halts in Zynga were for about 50 minutes in both cases. Huh?

What should have happened? Some traders told me Nasdaq should have halted the stock until all the orders cleared and everyone knew where they stood.

But Nasdaq had its reputation on the line. It is reasonable to assume that Nasdaq knew that the trade confirmations were not available. I can only conclude they made the decision to open regardless.

And Nasdaq tested the system all week!

There will also be claims from traders to be made whole. Lots of claims.

Regardless: there will be questions. About what happened, but also broader questions about market structure.

One last thing: can you argue this is about NYSE vs. Nasdaq? Oh, you can bet that the NYSE will argue that they have human beings and this would not have happened with a human being calling the open. Maybe. But you can bet there will be calls to look at market structure in general.